Order Placement Strategies in a Pure Limit Order Book Market

Abstract

Using order book information from the Australian Stock Exchange (ASX), we examine whether (and to what extent) the order book affects investors' order placement strategies. We find that the top of the book always affects order submissions, cancellations, and amendments, and the rest of the book mostly affects order cancellations and amendments. The previously documented order submission aggressiveness, given a crowded first step of the book, persists to other price steps and is found in order amendments and cancellations along the book. Finally, investors tend to fill in the large price gaps in the book by submitting or amending orders. (c) 2008 The Southern Finance Association and the Southwestern Finance Association.

Order Aggressiveness of Institutional and Individual Investors

“…and Caglio, 2005;Hall and Hautsch, 2006;Ellul et al, 2007;Aitken et al, 2007b;Cao et al, 2008). Past research on the effect of volatility on order aggressiveness is less conclusive.…”

Evolving Dynamic Trade Execution Strategies Using Grammatical Evolution

“…When the bid-ask spread widens, traders prefer to submit limit orders in order to avoid large bid-ask spread cost [3,6,17,18,22,23]. Prior research is inconclusive on the effect of market volatility.…”

“…Ranaldo [18] supports an inverse relation between order aggression and volatility, while Lo and Sapp [14] report a positive relationship between order aggression and volatility. Cao et al [3] find that volatility has a minimal effect on order aggression. Verhoeven [22] argues that greater price volatility implies that a trader has a greater chance of executing his order at a better price.…”

“…Traders are more willing to place market orders when the market depth on the same side of the order book is large. If the market depth on the opposite side is larger, traders prefer to submit limit orders [3,6,18,23]. The incoming limit orders will have lower execution probability, suffering higher non-execution risk.…”

Dynamic trade execution: a grammatical evolution approach

“…If the market depth on the opposite side is larger, traders prefer to submit limit orders (Cao et al, 2008;Duong et al, 2009;Ranaldo, 2004;Xu, 2009). When the bid-ask spread widens, traders prefer to submit limit orders in order to avoid large bid-ask spread cost (Biais et al, 1995;Cao et al, 2008;Duong et al, 2009;Pascual and Verdas, 2009;Ranaldo, 2004;Verhoeven et al, 2004;Xu, 2009). Prior research is inconclusive on the effect of market volatility on order aggressiveness.…”